Who is Archegos Capital?

Who is Archegos Capital?

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print

From seemingly out of the blue, Archegos Capital became the most talked about investors in the world last week. And it was not for a good reason.

According to reports, Archegos Capital, the New York-based family office of Bill Hwang, accumulated large, concentrated positions in certain stocks through total return swaps. When those stocks began to drop in price, the decreasing values required additional collateral to be provided to the prime brokers to maintain the positions. Archegos Capital did not have enough liquid assets to cover the margin calls, and the counter parties began to sell off large blocks of the names in an attempt to mitigate their risk and reduce their exposure. As more of Archegos Capital’s counterparties entered the market attempting to reduce their exposure, the sell off further exacerbated the falling prices of the stocks. Other investors uninvolved began to see losses and started selling into the mania to protect themselves.

When all was said and done, it is estimated that Archegos Capital’s counterparties suffered billions of dollars in losses, while Archegos Capital itself saw $8 billion disappear. The stocks that were the subject of the trading saw millions of dollars in losses of market value.

This story is a familiar one.

What happened last week is the boogey man of every trader, broker, bank and regulator. What makes this particular situation so incredible, is that it is exactly the type of activity that the Wall Street Reform Act of 2010 was meant to address and prevent, and the same types of activities that lead to the credit market meltdown in 2007. So, how could this happen?

For years, Bill Hwang symbolized the success of Tiger Management Founder Julian Robertson’s “Tiger Cubs” strategy where Robertson would seed mostly young, unproven but smart hedge fund managers, which later blossomed into hedge fund titans. At his zenith in 2007, Hwang’s hedge fund firm Tiger Asia had more than $8 billion in management and reportedly generated an annual return in excess of 40%. In 2012, an SEC investigation ended with Hwang entering into a settlement which prohibited him from managing money for clients. He was not, however, prohibited from managing his own money. Hwang returned all outside capital and converted Tiger Asia into a family office: Archegos Capital.

Family offices that exclusively manage one fortune are generally exempt from registering as investment advisers with the SEC. As a result of not having to register, family offices can avoid compliance program requirements and SEC oversight applicable to registered investment advisers, including SEC examinations and, perhaps very importantly in this situation, certain regulatory filings, like Form PF, which are designed to identify areas of systemic risk in the financial system.

Another contributing factor was the nature of the instruments themselves. Total return swaps are agreements with prime brokers that allowed Archegos Capital to take on the profits and losses of a portfolio of stocks without actually owning those stocks. Therefore, Archegos was not obligated to file Section 13 shareholder filings required for large equity positions. Instead, because the reporting requirements for the underlying equity positions falls to the prime brokers that are the counterparties in the transactions, it is not possible to identify the investments as being associated with any specific investor. This anonymity may have been even more attractive in the past few months as the public reporting of positions has made some institutional managers susceptible to coordinated attacks by retail investors, as demonstrated earlier this year with respect to GameStop. However, in addition to cloaking the firm from adverse actions by other investors and market participants, it may also have cloaked the level of risk to which Archegos Capital was exposed from its counterparties and regulators.

Compliance Considerations for Family Offices

At present, regulators in the U.S., Japan, Britain and Switzerland are known to be investigating the fall out of the Archegos Capital trades. With the large losses suffered by the parties involved, the market turmoil created by the trading, and the global reach, it is unlikely that the full impact of the situation will emerge anytime soon. However, family offices, and others relying on exemptions from registration under the Advisers Act should expect to see an increased level of scrutiny, and likely a renewed discussion surrounding the appropriateness of continuing to exempt such firms from regulation.

Unregistered firms, exempt firms and family offices may also wish to revisit their compliance programs and risk management policies and procedures to ensure that they have adequately addressed their regulatory risks. Many firms, while not required to be registered, have adopted compliance programs in line with the Advisers Act requirements as part of their risk management posture, and in an effort to avoid similar situations.

If you would like to discuss your firm’s compliance program and risk management efforts in light of the Archegos Capital situation, please contact your Greyline consultant or J.P. Gonzalez at (425) 223-1538 or jp@greyline.co.

Related Posts

JP Gonzalez

JP Gonzalez is a Partner at Greyline and heads the company’s technology and sales initiatives globally. He is also a member of gVue’s steering committee. Prior to joining Greyline, JP spent six years designing and evangelizing Compliance Regulatory Technology for broker-dealers, investment advisors and fund managers, where he assisted clients with all aspects of complying with FINRA, SEC and state rules and regulations related to a firm’s code of ethics. His technology background includes five years as a software developer and program manager at Microsoft, with his last two years at Microsoft as the UX/UI usability and accessibility program manager for Internet Explorer. He has a B.S. in Computer Science from Rose-Hulman Institute of Technology.

Nick Thomas

Nick Thomas is a Partner at Greyline and oversees the London office, which provides compliance support to U.K.-based hedge funds, private equity firms and other alternative asset managers. Prior to joining Greyline, Nick spent 13 years at the Financial Conduct Authority, the U.K. regulator, followed by three years at a well-known international compliance consultancy. During this time, he gained a broad and deep understanding of the U.K. regulatory environment applicable to alternative asset managers – both from the perspective of the regulator and the firms being regulated. His time at the FCA included working as a supervisor on the alternative investments team, with responsibility for supervising some of the largest and most prominent hedge funds in the U.K., and undertaking firm examinations across a broader population of alternative asset managers. Prior to this, he worked extensively on AIFMD implementation from the FCA’s perspective, as well as assessing applications from investment firms seeking to obtain FCA authorization. Nick obtained a BSc in Mathematics from Imperial College London. In addition, he holds the Investment Management Certificate (IMC), the Fundamentals of Alternative Investments Certificate and the Financial Planning Certificate (FPC). He also speaks Japanese.

Tim Goodwin

Tim Goodwin is a Partner at Greyline and the head of the Fort Worth office. Prior to joining Greyline, Tim spent two years providing ongoing compliance and consulting services to alternative asset managers, including private equity funds, venture capital funds, real estate funds and hedge funds. He worked at TPG Capital for seven years in compliance and internal audit positions. As a director in the risk management and internal audit department, Tim was responsible for documenting and testing TPG’s allocation of fees and expenses, as well as preparing the firm for possible public listing, by leading TPG’s efforts in Sarbanes Oxley testing and compliance. Before joining the internal audit team, he spent five years running TPG’s compliance testing efforts across all of TPG’s businesses, including the private equity funds, credit platform, hedge funds, a 40 Act fund and a registered broker dealer. Prior to joining TPG Capital and moving to Texas, Tim spent more than six years with UBS Wealth Management (New York and New Jersey) in various compliance roles, touching on investment company, investment adviser and broker dealer compliance. He was most recently the chief compliance officer to UBS’s unit investment trusts and a compliance director for advisory products, including the separately managed account, financial advisor discretionary and mutual fund wrap programs. He assisted UBS in its first ever required annual reviews conducted pursuant to the compliance program rule, helped design and implement compliance policies and procedures for UBS’s advisory programs, and routinely assisted in updating required disclosure documents, including the Form ADV.

Jennifer Dickinson

Jennifer Dickinson is a Partner at Greyline and heads the firm’s Chicago office, as well as its CFTC/NFA practice. Her clients include private fund managers (hedge, private equity, venture capital and real estate), traditional RIAs, CPOs, CTAs and Swap Dealers. Jennifer advises on a range of compliance matters, including code of ethics/insider trading issues, risk management, compliance training, conflicts of interest and regulatory examinations. Prior to joining Greyline, Jennifer was the managing director of Sansome Strategies, a boutique compliance consulting firm specializing in alternative asset managers. Her other consulting experience includes serving as chief compliance officer for three prominent, SEC-registered investment advisers. Jennifer has also worked at noted law firms in the financial services space, including Cole-Frieman & Mallon LLP and Pillsbury Winthrop Shaw Pittman LLP. Jennifer began her career as the legal and compliance administrator at Standard Pacific Capital LLC, a SEC-registered, multi-strategy hedge fund manager based in San Francisco. Jennifer has an undergraduate degree from DePauw University and a law degree from Golden Gate University School of Law, where she was the editor–in–chief of the Law Review.

Sean Wilke

Partner & Head of Strategic Growth
Sean Wilke is a Partner, and the Head of Strategic Growth at Greyline and its affiliate GCM Advisory, which specialize in compliance consulting and outsourced finance, accounting and operations. He has extensive experience advising various types of investment managers, including hedge funds, private equity/credit funds, wealth managers, registered investment companies, institutional allocators and family offices, on a range of regulatory, compliance, operational and management matters. Before joining Greyline, Sean was a director within the governance, risk, investigations and disputes group at Duff & Phelps, where he focused on compliance and regulatory consulting for the alternative investment space. Prior to that, he was the general counsel and chief compliance officer of Bramshill Investments, a $4 billion, multi-strategy investment manager, where he oversaw all legal and compliance affairs. Sean also spent four years as a corporate and securities attorney at a law firm, as well as three years as a compliance associate at Bear Stearns & Co., where he performed surveillance for the investment and merchant banking groups. Sean has a B.A. in Political Science from Rutgers University and a J.D. from New York Law School.

Kathy Malone

Partner & Head of Consulting
Kathy Malone is a Partner at Greyline and co-head of the firm’s New York office. Before joining Greyline, she was an examiner with the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations in the Boston and New York offices, where she participated in numerous investment adviser and broker-dealer examinations. Prior to her time with the SEC, she was an examiner with FINRA, completing many examinations of broker-dealers and enforcement referrals. Most recently, Kathy worked for a consulting firm where she assisted broker-dealers, investment advisers and investment companies with the registration process, examination support and ongoing compliance needs. She has a B.S. in Finance from Villanova University and a Juris Doctor from Seton Hall Law.

Talia Brandt

Partner & Chief Operating Officer
Talia Brandt is a Partner at Greyline, and a member of gVue’s steering committee. Her team from Vista Compliance, LLC joined Greyline in May 2017. Talia founded Vista Compliance — a compliance consulting firm servicing broker-dealers, registered investment advisors and private fund managers — in April 2008. In her role with Greyline, Talia works closely with firms to ensure compliance with FINRA, state and SEC regulations. She has developed and implemented compliance and financial policies and procedures to ensure solid internal controls are in place for varying financial services firms. In addition to her compliance consulting work, Talia has served internally to firms as chief compliance officer and holds FINRA Series 7, 24, 66 and 79 registrations. Prior to forming Vista Compliance, Talia worked at Goldman Sachs in the investment management division in Salt Lake City. She then moved to the Bay area, where she went to work with smaller startup, boutique financial services firms.

Matt Okolita

Managing Partner

Matt Okolita is Managing Partner of Greyline, and a member of gVue’s steering committee. He has extensive SEC, FINRA and CFTC experience, having worked for and with premier hedge funds, private equity and venture capital firms, CLO and other debt managers, business development companies and mutual fund managers in both legal and compliance roles. Matt’s background includes undertaking a variety of legal and compliance functions, serving as counsel and chief compliance officer for startup managers, as well as international asset managers managing more than $30 billion. Matt has a Bachelor of Arts in Political Science and Economics from Bucknell University and a Juris Doctor from Suffolk University Law School, with distinction in Business Law and Financial Services.